Chris Ciovacco's Contributions

In an environment where financial markets are probably more dependent on the action of central banks than at any point in our lifetimes, the markets parsed every word of Ben Bernanke’s Congressional testimony Wednesday.

The if/when associated with the Fed’s plan to taper its bond purchases got a “sooner rather than later” economic data point Tuesday.

In 1977, Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve are “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates”.

Sometime between late Wednesday and mid-day Thursday, we should get a read on the market’s true reaction to the minutes from the last Fed gathering. At some point, the market will take a breather for a day or two in the form of a pullback.

Publicly-traded companies and analysts from Wall Street’s biggest wire houses are experts at setting low expectations and then exceeding them.

The question going forward for investors is whether improving economic data can offset concerns about the Fed tweaking their bond purchase program.

As we noted on May 31, bad things tend to happen when interest rates spike as they did in 1994. Rising rates made the first half of 1994 difficult for both stock and bond investors, something that is relatively rare over longer periods of time.

Experienced traders and investors respect and understand the concept of “Don’t fight the Fed”. The basic rationale behind the expression is that when the Fed is printing money, the odds are tilted in the bulls’ favor. Conversely, when the Fed is tightening policy, bearish odds begin to pick up.

The next formal policy statement from the Federal Reserve could prove to be unfriendly to the current stock rally.

The market currently has a mixed profile; the bears have control of the daily trend, but the bulls have not given up the weekly trend. The well-documented fears of Fed tapering are undoubtedly a significant factor in the market’s mixed picture. Economic reports, including those released early Monday, have added to the confusion among traders and investors.

From a probabilistic perspective, there are numerous ways to differentiate between volatility that should be ignored and volatility that should be respected. One of them is to use weekly moving averages. As long as the market maintains a bullish bias, the volatility is classified as “ignore it”.

In the investing world, we all have limited resources. We all need to make choices in terms of allocating those limited resources; would we rather be long or short stocks? Would we rather be in stocks or in bonds?

Since the S&P 500 made an intraday low of 1,536 on April 18, the widely-followed stock index has tacked on 130 points and the markets have migrated back to full-bore risk-on mode.

The market’s recent shift back into economically sensitive assets tells us stocks could continue their surprising march higher despite the ongoing calls for “sell in May”. As shown in the chart below, the S&P 500 made no progress during the last twelve years. The “no progress” pattern was recently broken, which could lead to head-scratching gains in the months ahead.

It is an understatement of grand proportions to say the financial markets are complex and have a lot of moving parts. Therefore, looking at what is actually happening vs. being overly concerned about what may happen next is a good way to stay in line with the forces of supply and demand.

For most of us that work on Wall Street, it is fair to say the financial markets are more dependent on low rates and central banks than at any time in our careers.

Earlier this week, we noted numerous concerns piling up in the stock and bond markets, such as leadership being provided by historically defensive sectors. The “read” by the markets may have been correct as recent economic data has fallen into in the “concerning” category.

An extended stock market received an excuse to sell off Monday after a report showed manufacturing activity pointed toward modest, rather than robust, economic growth.

One can argue that the fear of a systemic meltdown capped markets between early 2010 and late 2012. The primary driver behind meltdown fears was the European debt crisis. For various reasons, mostly related to the European Central Bank, markets are no longer on edge about the imminent collapse of the euro.

While it is unlikely the Fed’s easy money policies will be altered anytime soon, the release of the last Fed minutes showed how easily markets can be spooked. It is not in the Fed’s best interest to have a mass exodus from U.S. Treasuries since it puts upward pressure on interest rates.